Know the Differences Between Debts
Some might argue that there is no “good” debt, but a difference to consider is high-interest debt vs. low-interest debt.
An example of typically high-interest debt is credit card debt. As of 2018, the average interest rate on a new credit card is over 15 percent. This is the kind of debt you’ll usually want to pay off as aggressively as possible. For many people, it makes sense to prioritize getting out from under high-interest debt – even if means smaller savings for now.
On the other hand, some types of lower-interest debt are “designed” to be paid off over a much longer term. Take, for example, federal student loan debt. In most cases you have 10, 20, or 25 years to pay off your student loans. You may also be able to get a tax deduction on interest paid.
Now, that’s not to say that it’s a bad idea to pay off student loans early if you can manage it. But with larger, lower-interest loans, paying a little extra each month might not make a big enough difference to justify skipping savings. This may be especially true if you are able to have those savings matched in a 401(k).
Don’t Miss Out On Employer-Matched Money
If your employer offers 401(k) matching for retirement savings, it might make sense to take advantage of that – even if it means a little less money to throw at debt. After all, it’s kind of like “free” money, and you’re getting compounding interest plus a tax break on it. Depending on your loan situation, the interest you might save by paying off debts early may not be nearly as valuable as the return you’d be getting if you’d tucked that money into your 401(k).
Account For Windfalls
Once in a while, the skies open up and free money falls down into your hands. Okay, that’s not exactly what happens, but now that you’re paying attention, do you have a plan for any extra money that does come your way? This could be a work bonus, a bigger-than-anticipated tax refund, or even cash gifts during the holidays. Would you like to earmark all such windfalls for paying down debts? Or deposit them directly into your savings account? Or perhaps you’d like to divide such money between the two options. What matters is that you do have a specific plan in mind – because that makes it easier to resist the siren song of your local shopping mall whenever you unexpectedly find yourself flush with cash.
Put Side Gig Earnings Into Savings
You can only stretch a paycheck so far when looking for extra money. If being able to save but also beat debt at the same time is a really important goal for you, it may be time to start supplementing your nine-to-five income. Freelancing and “gig” jobs are an increasingly popular means for doing this. Perhaps you have a skill or hobby that you can transform into a second cash flow. Whether it’s DJing weddings, selling thrifted antiques on eBay, or starting a housesitting business, there’s more than likely a side hustle or two out there that suits your talents and lifestyle. Any money you make off your side gigs can go straight into your savings.